Verizon Q2 earnings top estimates; CEO will step down

Verizon Communications on Friday reported second-quarter earnings that topped the Street’s estimates, though it failed to match AT&T’s impressive wireless growth during the quarter. Revenue climbed to $27.5 billion in the June quarter, up 2.8% from the same quarter last year. EPS was up 6 cents sequentially to $0.57, a huge swing from the second quarter in 2010 when Verizon reported a loss of $0.42 per share. In wireless, the carrier netted 2.2 million subscribers — or “total connections,” rather — excluding gains made through acquisitions, and service revenues climbed 6.6% year-over-year. Verizon now reports total connections, which include machine to machine devices and other non-standard subscribers, and its total now sits at 106.3 million. The carrier also said that it activated 2.3 million iPhone 4 handsets in the June quarter. “In terms of earnings growth and the acceleration of revenue growth, this has been one of Verizon’s best quarters since the 2008 economic downturn,” said Verizon Chairman and CEO Ivan Seidenberg in a statement. “We expanded sequential margins in both our wireline and wireless businesses, and in the second half of the year we expect Verizon to build on this strong, positive momentum to continue to drive profitable, sustainable growth.” The company also noted that Ivan Sandberg will step down as CEO, replaced by Lowell McAdam. Sandberg will retail is his as chairman of the board. Verizon’s full press release follows below.

NEW YORK — Verizon Communications Inc. (NYSE, NASDAQ: VZ) today reported accelerated revenue growth and improved margins across its business groups, leading to a strong earnings performance in second-quarter 2011.

Verizon reported 57 cents in EPS in the quarter, compared with a second-quarter 2010 loss of 42 cents per share.

There are no adjustments to second-quarter 2011 earnings results. Adjusted second-quarter 2010 earnings were 51 cents per share, excluding the impact of divestitures and non-operational charges (non-GAAP). The most significant 2010 charges related to a workforce-reduction incentive offer that led to approximately 11,900 voluntary separations last year.

Strong, Positive Momentum

“In terms of earnings growth and the acceleration of revenue growth, this has been one of Verizon’s best quarters since the 2008 economic downturn,” said Chairman and CEO Ivan Seidenberg. “We expanded sequential margins in both our wireline and wireless businesses, and in the second half of the year we expect Verizon to build on this strong, positive momentum to continue to drive profitable, sustainable growth.”

Seidenberg added: “We expect Verizon Wireless to gain share in the retail postpaid market and widen its network-quality lead throughout 2011. We also continue to see strong customer demand for FiOS Internet and TV, and for cloud and other strategic services. At the same time, we remain focused on our cost structure, as we deliver improvements in wireline margins quarter after quarter.”

Consolidated Revenue Growth Continues to Accelerate

On a consolidated basis, Verizon’s total operating revenues were $27.5 billion in second-quarter 2011, an increase of 2.8 percent compared with second-quarter 2010. Last year’s results included revenues from operations that have since been divested.

Also on a comparable basis, consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) for second-quarter 2011 totaled $9.0 billion, up 5.2 percent year over year.

Cash flow from operating activities totaled $12.8 billion in the first half of 2011, down from $16.8 billion in the first half of 2010. Last year’s total included cash flow from businesses that have since been divested and the timing of favorable tax-related impacts, and 2011 totals include inventory purchases for wireless devices and the impact of previously announced pension-fund payments in first-quarter 2011. Verizon said its cash flow outlook for the remainder of 2011 remains very strong.

The company aggressively invested in growth opportunities in the first half of 2011. One example is the deployment of Verizon’s nationwide 4G LTE (fourth-generation, Long-Term Evolution) wireless broadband network. In first-half 2011, Verizon’s capital expenditures totaled $8.9 billion, compared with $7.6 billion in first-half 2010.

Verizon continues to expect full-year 2011 capital spending to be similar to its 2010 investment of $16.5 billion.

Verizon Wireless Delivers Another Strong Quarter

Verizon Wireless delivered strong growth in revenues, retail customers and other connections, driven by increased smartphone penetration and increased retail postpaid ARPU (average monthly service revenue per user). In the second quarter of 2011:

Wireless Financial Highlights

· Service revenues in the quarter totaled $14.7 billion, up 6.6 percent year over year. Data revenues were $5.8 billion, up $1.1 billion or 22.2 percent year over year, and represent 39.5 percent of all service revenues. Total revenues were $17.3 billion, up 10.2 percent year over year.

· Verizon Wireless added 2.2 million total connections, including 1.3 million retail postpaid customers, and 890,000 wholesale and other connections. These additions exclude acquisitions and adjustments.

· At the end of the second quarter, the company had 106.3 million total connections, an increase of 6.6 percent year over year, including 89.7 million retail customers and 16.6 million wholesale and other connections.

· At the end of the second quarter, smartphones were 36 percent of Verizon Wireless’ retail postpaid customer phone base, up from 32 percent at the end of first-quarter 2011.

· Retail postpaid churn was 0.89 percent, the lowest in the industry and the company’s lowest since second-quarter 2008. Total retail churn was 1.22 percent, an improvement of 9 basis points year over year and 11 basis points sequentially.

· Verizon Wireless continued to roll out its 4G LTE mobile broadband network during the quarter. As of yesterday (July 21), Verizon Wireless 4G LTE service is available in 102 markets across the country, covering a population of more than 160 million. By year-end, Verizon Wireless’ 4G LTE network, the fastest and most advanced LTE network in the U.S., is expected to be available in more than 175 markets across the country, covering a population of more than 185 million.

· The company introduced three new 4G LTE devices: the Droid Charge by Samsung, Revolution by LG and the MiFi 4510L 4G LTE Mobile Hotspot by Novatel Wireless. The company also announced that the 4G LTE-enabled Samsung Galaxy Tab 10.1 is available for pre-order; the device is expected to launch by the end of this month. During the second-quarter 2011, Verizon Wireless sold 1.2 million 4G LTE smartphones and Internet data devices.

· Verizon Wireless continued to invest in and enhance its 3G network, the nation’s largest and most reliable 3G network.

· During the quarter, Verizon Wireless deployed crisis response teams to help customers stay connected in areas devastated by disasters including the North Dakota floods, Arizona wildfires and Joplin, Mo., tornado.

Improved Revenue Trends in Wireline

Verizon’s Wireline segment continued to expand margins, supported by improved revenue trends. In the second quarter of 2011:

· Verizon added 189,000 net new FiOS Internet connections and 184,000 net new FiOS TV connections in second-quarter 2011. Verizon had a total of 4.5 million FiOS Internet and 3.8 million FiOS TV connections at the end of the quarter.

· FiOS penetration (subscribers as a percentage of potential subscribers) is now 30 percent or more for both services. FiOS Internet penetration was 34 percent at the end of second- quarter 2011, compared with 30 percent at the end of second-quarter 2010. In the same periods, FiOS TV penetration was 30 percent, compared with 26 percent, respectively. The FiOS network passed 16.1 million premises at mid-year 2011.

· Broadband connections totaled 8.6 million at the end of second-quarter 2011, a 3.3 percent year-over-year increase. FiOS Internet connections more than offset a decrease in DSL-based HSI connections, resulting in a net increase of 62,000 broadband connections from first-quarter 2011. Total voice connections, which measures FiOS Digital Voice connections in addition to traditional switched access lines, declined 7.9 percent to 25.0 million — the smallest year-over-year decline since second-quarter 2007.

· During the quarter Verizon continued to execute its global cloud strategy, rolling out an expanded portfolio of secure IT solutions and an operational model for its Terremark subsidiary. Verizon also continued to deploy integrated IT and communications solutions for multinational enterprise, medium-sized and government customers. These solutions included expansion of the company’s managed mobility services for tablets, mobile access to cloud-based SAP applications and enhanced security management programs for health care providers. Verizon also completed new agreements with a range of multinational corporations, including Constellation Energy, Epsilon, Masco Corp. and PHH Corp.

· Verizon expanded its global network infrastructure during the quarter as it continued to broaden its scope and capabilities. The company installed 63 additional Private IP edge routers for a total of 915 edge routers in 245 sites throughout 63 countries, activated more than 1,500 kilometers (932 miles) of ultra-long-haul network across the southern part of the United Kingdom, and completed a joint fiber build in Singapore, which almost doubles the coverage of the Singapore fiber-optic network. Verizon continued to demonstrate leadership in scaling the global IP network and kicked off the expansion of 100G IP backbone capabilities in the U.S. to nine routes.

NOTE: Reclassifications of prior period amounts have been made, where appropriate, to reflect comparable operating results for the divestiture of overlapping wireless properties in 105 operating markets in 24 states during the first half of 2010; the wireless deferred revenue adjustment that was disclosed in Verizon’s Form 10-Q for the period ended June 30, 2010; the spinoff to Frontier of local exchange and related landline assets in 14 states, effective on July 1, 2010; and other non-operational items. See the accompanying schedules and www.verizon.com/investor for reconciliations to generally accepted accounting principles (GAAP) for non-GAAP financial measures cited in this document.